Your Credit Score: A Necessary Bore — A Quick Guide for Millennials & Gen Z
Even though it has a name with gaming vibes, “credit score” sounds dull. Let’s be real here, it is dull! However, it’s important to understand your credit score because it helps you qualify for many financial services in the UK. These can include loans and credit cards, and it even plays into something as important as renting or buying a home. People often work on their credit score to ensure they can secure a mortgage when they are ready to buy a home.
What is a credit score?
Your credit score is a number generated from data by credit reference agencies (CRAs) based on your financial history over the past six years. This history includes application forms, credit behaviour, and even things like your addresses and how many bank accounts you have. It gives prospective lenders an idea of how safe or risky it is to lend you money. The higher your score, the better.
I’m part of Generation Rent. I probably won’t even be able to afford to buy a home when I’m 60. What’s the point?
I get it; I’m disillusioned too. Your credit score doesn’t just allow you to get a mortgage in the future! It also gives you access to the best interest rates on credit cards and many other credit products. If you’re not buying a home, you need a good credit score for renting. Yes, really! Your landlord or letting agent will check your credit score. This ensures you can keep up your rent payments and have a history of being a regular bill payer. This includes anything you pay by Direct Debit, so your phone contract, etc.
Okay, I’ll play along. What affects my credit score?
Positively:
· Registering to vote at your current address: CRAs use the electoral roll to confirm your address, and it looks better when all addresses line up
· Only borrowing what you can afford: credit is good if you pay it back on time
· Old credit accounts look great on your credit score: agencies look at the age of your accounts
· Paying your bills via Direct Debit: regular payments show companies you’re responsible
Negatively:
· Borrowing more than you can afford or always hitting your credit limit: if you can’t pay off your debts, you may have to file for bankruptcy, which affects your score for a long time
· Missing regular payments
· Having no credit history: lenders won’t know how good you are at paying money back
· Applying for credit too much: too many applications negatively impact your score, even if you’re successful
How do I find out my credit score?
You can apply to see your score with any of the three CRAs: Equifax, Experian, or TransUnion. There is usually a fee involved. Checkmyfile provides a comprehensive view of your credit score and history with all three, which can be useful to check all your details are correct. Lenders use a combination of these reference agencies, so it’s wise to check all of them.
If I can miraculously afford a home, what credit score do I need for a mortgage?
Lenders are allowing smaller deposits now, and interest rates are at an all-time low. Homeownership isn’t out of reach forever, even if it may feel like it sometimes! (Okay, it feels like it all the time, I know.)
As for the ideal credit score for a mortgage, there’s no magic number. However, as you might have guessed, the higher the better. If we take Experian as an example, it has a maximum score of 999. Experian recommends 881–999 for the best mortgage deals, all the way down to 561, where you may still get a mortgage, but at higher interest rates. Below that, a lender may decline a mortgage.
Six common, quick questions about credit score:
Can credit score affect car insurance premiums?
Yes, and any other insurance.
When does my credit score update?
Any new information should show up within 4–6 weeks.
What credit score do you start with?
It’s a common misconception that you start with zero. Your credit score is invisible until you’ve built a credit history. It would only start really low if you had bad credit habits from the start.
Which credit score is most accurate?
Experian is generally considered to be the most trustworthy, with accurate information. They are also the company that lenders will probably look to for your credit score.
Will credit score affect employment?
A very low score with a history of money mismanagement could lead your prospective employer to have concerns. This will only really apply in roles where you will handle large amounts of money or where bribery could be a concern.
What if I’ve never borrowed before?
As above, you won’t start with zero, but you should add some responsible borrowing to your finances to increase your credit score.
